Amid the expected aerial theatrics and high-tech displays at the annual Farnborough International Air Show, which opens on July 14 south of London, General Electric's aviation unit is promoting an altogether less glitzy technology. Executives hope that its new propeller-driven engine might provide an antidote to the airline industry's mounting woes.
The new engine, the GE M601 H80, is GE's (GE) first product in a bid to become a leading provider of turboprop engines, a retro design that has become an increasingly attractive option for commuter airlines, as well as corporate and private owners of aircraft, dealing with soaring fuel prices. It is also the first fruit of GE's acquisition earlier this month of Walter Engines, an Eastern European supplier of propeller engines for all manner of service aircraft, from Siberian cargo planes to Bulgarian crop dusters.
The turboprop market is enjoying a resurgence as an efficient alternative to fuel-thirsty jet engines. According to Richard Aboulafia, a vice-president of Teal Group, an aerospace and defense company in Fairfax, Va., turboprop-powered regional aircraft enjoyed their best sales in more than a decade in 2007, leaving such companies as Bombardier Bombardier with record backlogs. Last year, Continental Airlines (CAL) became the first U.S. carrier to modify an all-jet fleet, adopting some turboprop planes at its Newark (N.J.). "The market is fantastic right now," says Aboulafia. "Depending on the route and the aircraft, these types of engines can be 20% to 30% more fuel-efficient."
Back to the Future
GE's overall plan involves modernizing the engine designs of 85-year-old Czech manufacturer Walter. Despite reporting revenue of $28 million last year, cash-starved Walter has not been able to invest in modern design tools, such as sophisticated equipment to study computational fluid mechanics, the enormously complex ways in which air moves around engines. Many of Walter's engine specs and use of materials will be updated to conform to Western standards, driving down manufacturing costs. "We'll be working to improve these engines for a long time," says Gary Leonard, GE's global technology leader for propulsion and energy. He is overseeing the teams of American and Czech engineers who will be working together.
In other words, GE engineers will attempt to innovate by applying cutting-edge tools to tried-and-tested designs in need of an update. According to Chet Fuller, general manager for marketing at GE Aviation, this approach will deliver incremental results over a period of years. The new M601, for instance, now boasts improved aerodynamics that allow it to maintain a steady power output as it climbs in altitude. Next up is a redesign of the gearbox, an important technical partner of turboprop engines and a component that's vital for fuel efficiency. Over the next two to three years, engineers plan to broaden GE's line of offerings, creating a portfolio of engines ranging in power.
The M601 is also GE's first shot at market heavyweight Pratt & Whitney, which currently accounts for the lion's share of general aviation turboprop sales, or nearly 15,000 of the 20,000 units sold annually. A unit of United Technologies (UTX), Pratt doesn't break out specifics for its small-engine division, but the operation accounted for nearly a third of the company's $12.1 billion in revenue last year. "Taking on Pratt is very daunting," says Aboulafia. "GE has so much work to do before it becomes a competitor."
Question of Co-Branding
GE first began exploring how to make a serious run at the turboprop market two years ago. Fuller says that developing a division to make turboprop engines could have cost GE upwards of $350 million. The Walter acquisition, by contrast, cost less than $70 million.
The announcement of the new engine also follows GE's highly scrutinized earnings report on 11 July. After a disappointing tumble last quarter, the company mostly met expectations, boasting second-quarter earnings (BusinessWeek.com, 7/10/08) of $5.4 billion, while revenues rose 11%, to $46.9 billion. GE is now likely to emphasize finding new revenue streams for its biggest businesses, including aviation. "I am encouraged by a lot of what's going on in a lot of the core business," says Brian Langenberg, founder of Langenberg & Co., a New York asset manager, who notes the importance of aviation to the company's future.
But to make the acquisition work, GE will have to invest heavily in the small manufacturer. And if GE fails to meet profit expectations in future quarters, the investment could be put in jeopardy. Another challenge will be to maintain the brand equity of Walter Engines while supplementing it with GE's brand name. For now, GE will co-brand future engines in an attempt to merge the best associations of both. "The brand has real value," says Fuller. "The last thing we want to do is wipe that out."